Negative headline seemed oddly appealing, eh?

Maybe it needs a picture of a lighthouse peering through a perilous-looking sky to darken the financial atmosphere a bit further…

But it gets our attention – quickens the heart rate, raises blood pressure.

Welcome to Headline Writing 101.

This misdirection media shell gamed is designed to twist meanings and impressions – clutter the optics with uncertainty and drive ill-advised actions.

So what’s actually “going down…?”

Well, the pace of growth in earnings for one.

And it’s perfectly logical to expect that change as time ratchets forward and the boost to earnings growth comes back to its normal trend line.

That shift will spook folks into 2008, 1987 and even 1929 thinking patterns.

But for those who still think it’s all rigged, political or worse, driven by QE, then hopefully these notes will add perspective to those assumptions you’re making.

Some Further Explanation

There is a certainty ahead.

It’s a mathematical fact, so to speak: The pace of growth in bottom-line earnings will indeed fall back as time proceeds further away from the US tax benefit / repatriation boost which has led to a new and higher foundational level of earnings. 

But it’s also NOT either of the following scenarios:

a) That any reference to "falling earnings" is not true at all. It’s just that growth rates will slow. The former is scary while the latter is just fine, and

b) The fantasy that actual net earnings themselves are / will fall.

The Bottom Line on This Data

We expect 2019 will see lower S&P 500 earnings growth rates. 

It can't help but unfold as the "round-trip" of the big pops referenced above is breached.

The base of earnings grew by well over 20% this year. And as 2019 dawns in a mere four months’ time, expected growth rates for S&P 500 earnings are +8.2% and +9.3% respectively.

But What About...?

Hold on. If you allow yourself to get lost in the negative suggestions and concerns that have been repeatedly voiced since the lows of March 2009, then the risk to your investments is severe. 

In fact, far more severe than most of what has been the worrying elements since those fateful early months of 2009.

The latest AAII sentiment data shows we are still in the roughly 2/3's versus 1/3 camp – Neutral and Bearish vs Bullish.

Meanwhile, jobs, cash flows, assets, net worth and investments continue to expand.

How Do We Know That?

Because truckers hauling stuff around are busier than they have ever been:

Down Chart1

The chart above is from Scott Grannis of Calafia Beach Pundit. 

It tells us more about what we reference just about every week – that the Barbell Economy is strong and steady, so don’t risk getting lost in the antics, the noise or politics.

The bottom line: America’s expansive fleet of trucks has hauled almost 8% more tonnage for the year ending July 2018 than it did last year. 

In fact, look at how much busier those trucks are today versus the 2007-2008 peak.

And if you recall, the capital strike we regularly suggested was underway during the Obama years is slowly beginning to thaw.

And it better thaw more just to keep up with the demand coming down the pipeline from Generation Y’s Millennial market.

What we can see is back to just before the November 2016 election truck tonnage was up right at 15%!  

Make no mistake, this is strong and clear evidence that the physical economy is expanding - and at a far more impressive pace than many are able to accept.

There is increasing evidence of a steady pick-up in business investment (think about the record R&D dollars invested in the Q1 and Q2 GDP data, which are still not yet even being felt for the most part).  

New investment takes time to hit "the system" so we need to be patient and recognize the long-term horizon is strong.

And incentives DO matter to the business and corporate world. 

Like it or not, the risks of those willing to make investments in the future need to have rewards - without which, the risk inherent in all of that investment may not be worth taking. 

It's been this way since the beginning of time.

Taking away the lop-sided political arena business was forced to navigate has had the expected result - businesses are ramping up investment, and we should see increasing evidence of this in the months and years to come.

That means more jobs, more consumers, more demand, and higher levels of technology, investment and services.

The Supporting Flow?

And have a look at another great chart from Scott Grannis below, which shows capital goods orders, which are a direct indicator of the business investment elements covered above:

Down Chart2

Mimicking the increases in truck tonnage movement in the system, orders are up 15% since the end of 2016.  In fact, they’re up 8% for the year ending July 2018.

It seems clear that while nominal orders have been rising at a fairly impressive rate of late (now at record growth rates on the 3-month moving average), they are still far lower in real terms versus levels seen in the early 2000s.

Which Means…?

General, overall fear - and the capital strike we have referenced often - means that "business investment" has been very tepid at best in the past 18 years. 

It’s just one set of factors that has caused the economy to experience "the weakest recovery on record" coming out of the 2008-2009 fiasco.

That’s what’s actually going down, folks.

Mike Williams
Founder and Managing Partner of Genesis Asset Management, New York